Her Majesty’s Revenue and Customs (HMRC) are planning to introduce a scheme known as domestic reverse charge which will change the way VAT is collected in the building and construction industry. It’s intended to make sure VAT is properly paid, closing loopholes for fraudsters. 
 
Customers receiving building and construction services will have to pay the VAT to HMRC, rather than to their supplier. The new charge will cover services that are reported under the Construction Industry Scheme (CIS), but won’t affect consumers. 
 
The legislation and guidance were published in November 2018, following a long consultation. The charge was due to be introduced on 1 October this year, but HMRC has now announced that implementation will be delayed until 1 October 2020. 
Why delay the reverse charge? 
HMRC said that the long lead-in would allow businesses time to make changes to their administration processes and to cover any possible impact on cashflow. 
 
Accounting processes also need to be updated to make sure that VAT is correctly allocated, and that customer billing is clear. 
 
Announcing the delay, HMRC said that industry representatives had raised concerns that businesses would not be ready to implement the change. 
 
What is included in the domestic reverse charge? 
The new domestic reverse charge will affect supplies at the standard or reduced VAT rates where CIS reporting is needed. 
 
Supplies between sub-contractors and contractors, as described by CIS, will be included unless they are supplied to a contractor who is an end-user. 
 
Who is an end-user? 
If someone will use the building or construction services for themselves, rather than selling them on as part of their own building or construction business, they will normally be an ‘end-user’. 
 
Landlords, tenants and some other connected users can also be treated as end users. 
 
Mixed supplies 
If there is a reverse charge element, everything supplied will be subject to the domestic reverse charge. So, for example, an invoice including both materials and labour will all be subject to the reverse charge. 
 
What are the implications of the reverse charge? 
If you are a supplier, you will need to validate your sub-contractors for CIS purposes as usual. You will also need to check your customer’s VAT status and confirm whether they are the end user. It will be important to keep a record of these steps. 
 
If the customer isn’t VAT registered or is an end-user, then nothing will change, and you will continue to charge 20% VAT on income. 
 
If your customer is VAT registered and is not an end-user, then the reverse charge will apply. 
 
Your invoices will have to clearly state when the reverse charge is being applied. Your VAT-registered customers will have to charge themselves VAT and then claim relief in the normal way, using the reverse charge tax rate. 
 
If your business is in building or construction, we will be happy to help you prepare for the introduction of the domestic reverse charge in 2020, just give us a call
Tagged as: VAT
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